How is a Debt Service Coverage Ratio Calculated?
The Debt Service Coverage Ratio is calculated by dividing the property’s net operating income (NOI) by its total mortgage debt service for the year. For example, if an Arizona property earns $120,000 a year in rent and the mortgage payments total $90,000 annually, the DSCR would be 1.33, indicating that the property earns 33% more income than the debt payments, which suggests profitability.
How Does an Arizona DSCR Loan Work?
In Arizona, a DSCR loan works by using the rental income from your investment property as the primary criterion for loan approval. This method benefits investors in high-demand rental markets by simplifying the lending process and focusing on property income instead of personal financial details, allowing for faster loan approval and potentially less paperwork.
What is a Good Debt Service Coverage Ratio?
For most lenders, a good DSCR is typically 1.0 or higher, meaning the property’s income exactly covers the debt payments. However, a DSCR of 1.2 or higher is generally preferred as it indicates the property generates sufficient revenue to comfortably handle the debt with extra to accommodate any fluctuations in operating expenses or potential vacancies. Higher ratios can also potentially secure better loan terms, reflecting a lower risk to lenders.